Binance Can’t Keep Its Story Straight on Misplaced $1.8B USDC

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A new and detailed investigation by Forbes has raised significant questions about the management and custody of customer assets and stablecoin collateral by Binance. There are many possible explanations for the nature and intent of certain on-chain transactions highlighted by Forbes, and they could be entirely innocuous. But Binance’s so far confused and sometimes contradictory responses to the findings do not inspire confidence, particularly in a post-FTX era of rightfully widespread suspicion of centralized custodians with off-chain balance sheets.

Cryptocurrency exchange Binance moved $1.8 billion of collateral meant to back its customers’ stablecoins to hedge funds last year, according to Forbes. In a statement sent to CoinDesk, a Binance spokesperson said in part that the transactions identified by Forbes relate to internal wallet management and did not affect the collateralization of user assets. Forbes Director of Data and Analytics Javier Paz discusses the key takeaways from the article.

Crucially, according to Forbes, this outflow was not accompanied by a corresponding reduction in the circulating supply of b-USDC tokens.

Binance’s various attempts to offer an innocent explanation of Forbes’ findings have not provided a unified and consistent – much less entirely compelling – justification for what could, in the worst case, indicate the misuse of customer funds. Before publishing a more focused and detailed account Wednesday morning, Binance officials offered a number of differing, even contradictory explanations. Equally galling, Binance’s responses have continued the petulant and defensive tone of many of its previous dismissals of close investigative attention.

The worst-case scenario

Forbes’ investigation was motivated by mounting evidence of past problems with Binance’s asset management practices. Binance has admitted to Bloomberg that, for certain periods of time, it failed to maintain clear 1:1 backing of its wrapped b-assets in a segregated and transparent manner. In this context, the exchange’s attempt to paint an act of journalistic analysis as “conspiracy theories,” while suggesting the investigation was motivated by nothing but “collecting a lot of views and clicks,” is beneath the dignity of an organization hoping to maintain a leadership position in a high-risk, fraud-riddled industry.

Binance CEO Changpeng Zhao even retreated to the oldest refuge of scrutinized crypto organizations, declaring the Forbes reporting nothing more than “FUD,” or fear, uncertainty and doubt. But this lazy, knee-jerk dismissal, now as ever, ignores a simple reality: Unclear or incomplete answers from the people most obligated to have them are far more serious sources of confusion and anxiety than accepted facts and reasonable questions surfaced by journalists.

The least charitable interpretation of the Forbes findings, articulated as a hypothetical by Lumida CEO and co-founder Ram Ahluwalia on CoinDesk’s “First Mover” program Tuesday, is that Binance was engaged in some form of rehypothecation. That is, that the funds backing b-USDC were loaned to counterparties or otherwise put at risk. Based on this possibility, Forbes has compared its findings to the bad practices that led to the collapse of FTX.

This was broadly the claim made by research firm ChainArgos in a Jan. 2 report that first drew attention to the unusual activity. “Someone received a loan of something like $1 billion for about 100 days,” ChainArgos claimed. “It is not clear exactly what happened … but this is very large, very obviously manual and very recent.”

Another theory, hinted at in Forbes’ reporting, is that rather than high-risk rehypothecation, the transactions’ net effect was to swap USDC for BUSD issued by Paxos (these events predate a recent New York Department of Financial Services order halting that issuance). This would have allowed Binance instead of Circle to collect the rising interest on instruments including U.S. Treasury bonds that back the stablecoins. This would be a perfectly rational business move, but could mean b-USDC was at points effectively backed by BUSD instead of USDC.